Spain bonds stable as bank woes re-emerge

Greece’s Pasok takes a crack at forming government

By

WilliamL. Watts

FRANKFURT (MarketWatch) — Pressure on Spanish bonds abated Thursday, a day after the government moved to partly nationalize the country’s fourth-largest lender and was expected to take further action to shore up a financial sector decimated by the collapse of a property bubble.

Nevertheless, economists said markets would remain vulnerable to fears that the cost of bailing out the banking sector could force Spain, the euro zone’s fourth-largest economy, to seek a rescue of its own.

A report Thursday in the El Economista newspaper said the Spanish government is talking with the European Union about tapping the euro-zone rescue fund or the European Investment Bank to shore up its troubled banking sector.

The yield on 10-year government bonds (10YR_ESP) fell 0.12 percentage points at 5.99%, according to electronic-trading platform Tradeweb. Yields soared by around a quarter-percentage point on Wednesday, pushing the 10-year rate above the 6% level for the first time since April.

“Yields at those levels make fiscal consolidation that much more difficult, and the effect of higher yields on Spain’s corporates will put an additional brake on the economy at a time it needs growth more than anything,” said Elisabeth Afseth, fixed-income strategist at Investec in London.

Madrid’s IBEX 35 Index (IBEX) rebounded 3.4%, a day after falling to its lowest close since 2003.

`Facing the real-estate problem’

The Spanish government on Wednesday night moved to rescue Bankia, taking a 45% stake in the country’s fourth-largest lender. The bank has the largest exposure to Spanish property developers, with around 37.52 billion euros ($48.8 billion) in loans to the sector, of which nearly 18 billion euros are considered problematic, according to The Wall Street Journal.

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Meanwhile, strategists note that the government is widely expected on Friday to ask banks to set aside an additional 30 billion euros of capital against property assets.

“While investors’ expectations and our own are very low, the government is finally facing the real-estate problem, which we view as positive for the system long term, but it should mean downgrades coming through in 2012-13 for the banking system,” according to Jaime Becerril, analyst at J.P. Morgan Cazenove.

With distressed loans seen totaling as much as 180 billion euros, however, investors may fear that the plan won’t go far enough, said Michael Hewson, market analyst at CMC Markets.

“This sounds all very laudable, but one wonders how they expect to do that when the Spanish economy is shrinking and unemployment continues to rise,” he wrote in emailed comments. “The risk is that the sovereign takes on the liabilities, and with that the solvency of the sovereign then comes into question.”

Writing in the Financial Times on Thursday, economists Nouriel Roubini and Megan Greene of Roubini Global Economics warned that the size of the Spanish economy means the European Union gets “only one roll of the dice” if it is forced to attempt a rescue.

”The only way for there to be a happy ending in Spain is if action is taken swiftly in Brussels, Frankfurt and other European capitals. But that is not likely to happen,” they wrote. “The euro-zone periphery and Spanish crisis looks like a slow-motion train wreck.”

Greece also in focus

Reuters

The leader of Greece’s Socialist Pasok party, Evangelos Venizelos, leaves a news briefing in Athens after a coalition led by a left-wing party opposed to an international bailout fell apart, but said he would continue efforts to form a government when he receives a mandate from the president.

Investors also were paying close attention to Greece. Evangelos Venizelos, leader of the Socialist party, known as Pasok, is attempting to put together a coalition government after efforts by the conservative New Democracy party and the antiausterity Syriza party failed.

Prospects for a breakthrough improved after a small leftist party, the Democratic Left, distanced itself from Syriza after previously saying any coalition government would have to include the party.

Pasok, which came in third in Sunday’s splintered parliamentary elections, faces long odds in putting together a government. Analysts said prospects are rising for a new election, likely around June 17.

Meanwhile, talk of a potential Greek exit from the euro-currency union continues to circulate. Sunday’s elections saw the probailout New Democracy and Pasok parties, which have long dominated Greek politics, decimated. The two parties fell two seats short of a combined 151-seat majority in the Greek parliament.

Greece’s euro-zone partners on Wednesday agreed to disburse all but €1 billion of a €5.2 billion aid tranche on Thursday. Greece had agreed to pass additional austerity measures in return for its latest bailout and has until June to implement the measures.

Meanwhile, German Finance Minister Wolfgang Schäuble warned that Greece must stick to the measures to remain a member of the euro.

“It’s an extraordinarily strenuous demand, to make the adjustments in Greece while staying in the common currency,” he told reporters in Berlin, according to the Associated Press.

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